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Question 36: Jumanji Corp. earns perpetual free cash flows of $8, 230,000 annually in a perfect capital market where its corporate tax rate is zero. Its unlevered cost of equity is 8.1% and it is currently all equity financed. Jumanji wants to issue $42,000,000 of perpetual debt and use the proceeds to repurchase some shares. The cost of debt is 4%. The company has 580,000 shares outstanding. Once the debt issue and share repurchase is completed what will be the required rate of return on the equity? a) 10.78%% b) 10.85% c) 11.15% d) 10.99% e) 11.04%

Question 36: Jumanji Corp. earns perpetual free cash flows of $8, 230,000 annually in a perfect capital market where its corporate tax rate is zero. Its unlevered cost of equity is 8.1% and it is currently all equity financed. Jumanji wants to issue $42,000,000 of perpetual debt and use the proceeds to repurchase some shares. The cost of debt is 4%. The company has 580,000 shares outstanding. Once the debt issue and share repurchase is completed what will be the required rate of return on the equity? a) 10.78%% b) 10.85% c) 11.15% d) 10.99% e) 11.04%

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question 36: Jumanji Corp. earns perpetual free cash flows of $8, 230,000 annually in a perfect capital market where its corporate tax rate is zero. Its unlevered cost of equity is 8.1% and it is currently all equity financed. Jumanji wants to issue $42,000,000 of perpetual debt and use the proceeds to repurchase some shares. The cost of debt is 4%. The company has 580,000 shares outstanding. Once the debt issue and share repurchase is completed what will be the required rate of return on the equity? a) 10.78%% b) 10.85% c) 11.15% d) 10.99% e) 11.04%
Transcribed Image Text:Question 36: Jumanji Corp. earns perpetual free cash flows of $8, 230,000 annually in a perfect capital market where its corporate tax rate is zero. Its unlevered cost of equity is 8.1% and it is currently all equity financed. Jumanji wants to issue $42,000,000 of perpetual debt and use the proceeds to repurchase some shares. The cost of debt is 4%. The company has 580,000 shares outstanding. Once the debt issue and share repurchase is completed what will be the required rate of return on the equity? a) 10.78%% b) 10.85% c) 11.15% d) 10.99% e) 11.04%
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